No Greece In The American Machine

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Wishfull thinking.

Groet / Cees

PS. Maar toch begrijp ik de houding van Merkel nog niet :(

No Greece In The American Machine
http://www.forbes.com/
Nouriel Roubini, Christian Menegatti and Arpitha Bykere, 03.25.10, 12:01
AM EDT
Likening E.U. member debt to U.S. state debt is misguided.

While the global economy is crawling out from the most severe recession
and financial crisis of the postwar period, the euro zone debt crisis
has significantly increased the chances of a double-dip recession in
Europe and a global slowdown. Sovereign risk has recently graduated from
being an emerging economy hitch to an advanced economy problem. The
Greek debt crisis has occupied center stage of the economic and
political debate. It is not just a Greek tragedy--the contagion could
spread to Portugal, Spain, Italy and Ireland. Indeed, at stake is the
entire euro zone framework. Yet fiscal sustainability and sovereign risk
also loom over other advanced economies like Japan, the U.K. and the U.S.

A few years back we expressed concerns about the persistence of
divergences in the euro zone and therefore its long-term success. We
studied financial integration and channels of interstate risk-sharing
and found that since the inception of the euro zone a higher degree of
financial integration and cross-county ownership of financial and
productive assets has contributed to improved risk-sharing in the
currency area, though risk-sharing remains significantly lower than in
the U.S. Going beyond the econometrics, this crisis highlights flaws in
the design of the euro zone--in this case the lack of political,
economic and fiscal federalism, and the absence of a mechanism like
those which exist in both the U.S. and Japan to bail out troubled members.

Still, the comparison between U.S. states and troubled euro zone members
is back in vogue. Projections show that in a matter of a couple of
years, the U.S. gross federal debt will exceed GDP and the federal
budget will never balance again. This is clearly unsustainable and
raises questions about the future of the U.S.' AAA ratings. While
sovereign risk definitely stalks America, it will not follow the same
script as the Greek tragedy. It won't be an undisciplined state or a
group of states that will imperil the U.S. framework of a single
currency area and fiscal federalism. No single U.S. state at present
displays the same fiscal vulnerabilities inherent in Greece or other
so-called PIIGS nations (Portugal, Ireland, Italy and Spain).

Mathematics tells a compelling story in this regard. The aggregate
fiscal deficit of the U.S. states is estimated to be less than 2% of
total U.S. GDP during 2008 to 2012, and the aggregate debt of state and
local governments is estimated to be less than 20% of GDP during 2008 to
2010--both far below those of several lagging euro zone countries. Let's
zoom into some specific, high deficit states-- New York, Illinois, New
Jersey and California (the NINCs)--and compare them with some vulnerable
EU countries--Portugal, Italy, Ireland, Greece and Spain (the PIIGS).
The fiscal deficit in the NINCs did not exceed 3% of GDP during 2008-09;
most countries in the PIIGS had deficits larger than 6% of GDP. The
debt-to-GDP ratios in the NINCs were below 15% during 2008 to 2009,
while this ratio was well above 60% for most PIIGS. The difference is
even more marked if we look at the interest payments-to-GDP ratio, which
was below 1% for the NINCs but above 6% for most PIIGS. However,
interest payments as a ratio of revenues were around 4%-7% in the NINCs
and above 10% in Greece and Italy, indicating that high outstanding debt
and interest rates pose debt servicing challenges to both the NINCs and
the PIIGS as both face weak economic recovery prospects.

Overall, there does not appear to be a Greece among the U.S. states in
terms of fiscal and systemic risks. Yet we are witnessing increasing
fiscal deterioration in U.S. states, led by cyclical factors (housing,
manufacturing and consumer downturn) as well as structural factors (lack
of fiscal discipline during boom years and a structural rise in
spending). State governments, like their federal counterpart, might lack
the political will for fiscal reforms, but unlike their federal
counterpart, they are required to balance their budgets. Sluggish
revenues, political obstacles to fiscal reforms and challenges in
servicing debt will increase downgrades and yields on municipal bonds.
However, fiscal federalism, under which the federal government transfers
funds to the states, and additional federal stimulus for state and local
governments to prevent state deficits from becoming a drag on U.S.
economic recovery will help states partially close their budget gaps.

Since states cannot file for bankruptcy and are constitutionally
required to balance their budgets, they will cut spending and raise
taxes to close the remaining budget gaps. Municipalities can file for
bankruptcy and will increasingly do so due to weak revenues and high
labor costs. However, transfers from federal and state governments,
federal subsidy in the municipal debt market and ample room to cut
spending will allow municipalities to delay interest payments or
restructure debt through bankruptcy rather than default. Thus, implicit
and explicit federal backstopping will avert a Greece-like risk of
default by U.S. states and a European Monetary Union-like domino effect
among states and municipalities. Fiscal backstopping will, however,
continue to raise the combined U.S. state, local and federal debt burden
and interest cost, pushing the painful fiscal adjustment to the future.

Posted by carolmay | 03/25/10 12:54 PM EDT
Being new to the study of economics, I have a question:

As I understand this article, the GDP of the entire U.S. is being used
to determine the debt/deficit ratio of individual U.S. states, while the
debt/deficit percentage of individual EU countries (PIIGS) is based on
the GDP of just that particular country (i.e., the Greece debt/deficit
ratio to GDP is based on Greece's GDP, etc.). In other words, "The
fiscal deficit in the NINCs did not exceed 3% of [U.S.] GDP during
2008-09; most countries in the PIIGS had deficits larger than 6% of
[their respective country's] GDP.

Wouldn't it be a more accurate comparison to calculate the PIIGS
debt/deficit to GDP ratios using an EU GDP, or calculate the
debt/deficit ratios of individual U.S. states (in this case the NINCs)
using each states respective GDP? Otherwise, it seems this article is
doing a bit of 'apples to oranges' comparing.

As I understand, California has the 8th largest economy in the world, so
I'm guessing that GDP numbers exist for the individual states. And, I'm
off now to start Googling for that data.

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